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Power Africa: Market Reactions to the the Obama Initiative

Six Africa veterans talked during a Chadbourne webinar in October about market reaction to the Power Africa initiative that the US government is making to help Africa double access to electricity within the next five years. The program aims to partner up to $7 billion in federal funding with $9 billion of private sector funding. There are six target countries initially: Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania. The panelists are Paul Hinks, CEO of Symbion Power, Steve Howlett, managing director for government, finance and advocacy of General Electric, Kwame Parker, head of project finance at Standard Bank East Africa, Obinna Ufudo, CEO of Transnational Corporation of Nigeria PLC, which is the project development company of Nigeria-based private equity fund Heirs Holdings, Justin DeAngelis, a director at Denham Capital, and Sean Long, CEO of Endeavor Energy Holdings. The moderators are Ken Hansen with Chadbourne in Washington and Ikenna Emehelu with Chadbourne in New York.

MR. EMEHELU: What about the Power Africa initiative most interests your company?

MR. HOWLETT: We are interested in Africa because the emerging middle class is demanding more infrastructure. The key infrastructure sectors are transportation, electricity and clean water. Having invented the light bulb, GE is very interested in electricity.

MR. HINKS: Organizations from the west find it increasingly difficult to get business in Africa because Asian governments and companies have monopolized the business in recent years. The Power Africa initiative gives a chance for companies like Symbion and Endeavor to get in on the act and do some real business in Africa. We have not done well to date chasing after projects in competition with Asian companies.

MR. UFUDO: Power Africa may make it easier for investors to commit funds to the power sector. Having US agencies involved will shine a light on both the challenges and the opportunities in the sector.

MR. DEANGELIS: We believe Africa is at an inflection point in terms of the ability to get power projects built. Not too long before the announcement of the Power Africa initiative, Denham announced an investment in our third portfolio company focused on African power development. What Power Africa does for us is provide additional US cover to help move projects from the idea stage to completion. It is an additional push to get projects completed.

MR. LONG: I have been looking at energy infrastructure and power in Africa for a long time, and one of the pieces to the puzzle that had been missing had been a heavy US government focus on helping the continent develop and build out its infrastructure.When I heard about the Power Africa initiative, I was excited because one of the largest economies in the world was now adding financial strength to solve a problem in Africa for which attention is long overdue.

MR. HANSEN: What do you see as the key impediments and challenges in developing projects? How is the Power Africa initiative relevant to those key challenges?

Developer Challenges

MR. HOWLETT: What is significantly different about Power Africa compared to previous initiatives is that it is more of a partnership with the private sector. GE is looking to put our own equity into many of these projects to give them a real kick start. We have experience working with the different agencies, and the agencies are not perfect. They have their own quirks, strengths and weaknesses. The key here is they will partner with the private sector actually to get things done. One of the things about which we are most encouraged is the ability to do real projects with both the local government and the US government behind them.After the financial crisis, the real problem in the world was liquidity. Now the world is awash in money, but regulators are strangling the ability of the private sector to move money around efficiently. The only way to get tenor and risk taken care of in these types of markets is to partner with international lenders to free up the capital. You can find three-year money in Nigeria, but you cannot pay for a power plant in three years.You need 12 or 15 years. That is where the international piece is critical.

MR. HINKS: Symbion is operating three projects in Tanzania currently. We also have one project in a partnership with Transcorp and one we are just taking over in Nigeria. Plus, we have done a lot of work with US government agencies, such as the Millennium Challenge Corporation, building power projects, distribution lines and substations.The big challenges are not in the will of the US government agencies but navigating the bureaucracy in many African countries where the inactivity can appear to be lack of interest, but it is just the old-style bureaucracy. If you recall when President Obama announced Power Africa in Tanzania, he said that Power Africa was also about speed. If we are going to show results on Power Africa, speed is key. Power projects take a long time to develop. They do not happen in three months.Nongovernmental participants can also be sand in the gears as they want to check all the boxes. In Nigeria we opted, because of speed, not to go to the traditional agencies for acquisition financing and decided, instead, to work with the local banks. That was the only way we were going to be able to do the deal in the time allotted for the privatization process that Nigeria adopted.

So for me the biggest challenges are government bureaucracy, checking boxes and achieving speed.

MR. UFUDO: In an environment like Nigeria, which I suspect is the same as the rest of the continent, the biggest problems are in the early development stage before the private sector is ready to invest. The Power Africa initiative can help provide funding for things like environmental studies and pre-feasibility studies for which it has been impossible to raise money. It can also help governments set the right policy environment to support private capital.

MR. HANSEN: It is interesting that there is a definition of success for Power Africa — doubling access to power in five years — and also that the initiative is a public-sector partnership with people that the US government does not control.How will the initiative affect the decisions that private developers make whether to spend their time and resources chasing projects? It sounds like we might be inclined to avoid the official resources in order to move the project forward more quickly by tapping local resources.

MR. HINKS: We have managed to get where we are in Africa so far with four power plants and some contracting work without any involvement by US government lending agencies.However, there is a big role for them when we get to the stage of long-term project developments. The issue in Nigeria was that the government has a timetable for the privatization. You had to submit a bid on day one, they would evaluate it and you had to then post bonds and letters of credit during the bidding process. We had the option of relying on local financing.Twenty years ago it may have been more difficult. Nigeria is an exception compared to most countries in sub-Saharan Africa because it is awash with money. However, in many countries it is possible to work to an extent with the local banks. They understand the utilities, the risks and the local environment. Their analyses of risk is very different from that of a foreign entity.

MR. HOWLETT: The US government agencies are better informed and more knowledgeable than many agencies. They understand the landscape. The issue with those agencies is the process of checking the boxes. It is not exclusively their issue, but speed is where we all have a problem.

MR. HANSEN: So one thing the participating agencies could do to make their support of the Power Africa initiative effective is to work on expediting reviews.

MR. HINKS: I would like to see more delegation of authority, especially on smaller transactions that are moving more quickly.It would help if they could empower others to do smaller things on their behalves and focus their limited resources on the major issues.

MR. DEANGELIS: Paul Hinks really hit the nail on the head. There is a massive opportunity in Africa. All the signs say that you should be able to build multiple gigawatts every year. The US can help by getting projects to close more quickly and by cutting through the bureaucracy and making sure that there is a clear regulatory environment. The US can get the structure in place to allow private investors like ourselves to invest.

It is not happening. Projects are dying on the vine. The capital is there, but it is a matter of getting from A to B. In Africa, it is not a question of just development 101. It is development 101 in an emerging market. Power Africa can help ease some of the commercial issues and bring real solutions to a region that is in dire need of new power generation.

MR. HANSEN: The challenge and opportunity for the US government are not only to bring its lending programs to bear, but also to deal government to government on the regulatory environment and rule-of-law issues broadly.

MR. DEANGELIS: Any developer starting on a project has an execution plan. If you execute correctly, you get to financial close. The issue is that development is never that easy. Part of the problem is clarity around how to get from A to B. There are thousands of development projects in Africa. Part of the art and science is figuring out which are the ones that are going to get to financial close at the end of the day.

MR. LONG: Ultimately, what is slowing the development of power infrastructure in Africa is the need for rationalization of power markets. You need appropriate tariffs for end users. You need the ability to transmit the power efficiently. You need efficient forms of power generation. All that is done in developed markets by private industry with some regulatory oversight. What most people forget is that the developed countries did not start that way. The issue is how to get from where we are today in Africa to an effective and rational market. Unfortunately, we cannot wait to get the market structured properly before the investing in infrastructure starts.

Power Africa can serve two roles. It can enable infrastructure to be put in place with private investors today while governments try to rationalize power markets. The strategy of teaming up or partnering with private industry was a wise one because it will help the US government see exactly what the impediments to investment are. At the same time, the US government see exactly what the impediment can help African governments develop and implement plans a rationalize their energy markets so that we no longer need the US government to address our needs. Many countries are trying to do that, but it is a process and it takes times.

MR. PARKER: It cannot be repeated enough that every country has a different regimen for independent power projects and its level of sophistication and maturity around private sector involvement in the power sector. Kenya is relatively mature in that there are already several IPPs and more are added every year. Impediments remain around getting power purchase agreements signed, but even that is improving. We are not at the point where there are completely standardized PPAs, but things are moving faster.

The other issue is how much new power should be sourced. Africa needs tons of power. The question is what comes first: do you build capacity and hope that it draws demand, or do you wait for new industry to demand more power? We are all a little nervous about how much more power we should even be financing.

Power projects are capital intensive, and the number of banks today that lend to projects in a country like Kenya is relatively small. A bunch are lending, but with country risk the number of players is limited. With Power Africa, the US government focus on putting dollars to work in Kenya becomes very important because the US government can provide a lot of financing in a market where we need more lenders. However, no matter how much capital is available, at the end of the day you need private-sector developers on the ground working through the issues to get a project to long-term financing. The US government should also spend a little more time thinking about how to let Kenya Power stand on its own two feet as the demand rises in response to the availability of power.

Payment Guarantees

MR. HANSEN: How can the US government do that? Are you thinking of the equivalent of a multilateral development bank partial risk guarantee, but coming from the US government to stand behind Kenya Power’s offtake obligations?

MR. PARKER: Something like that. Ultimately, if Kenya Power is unable to pay, then the US government stands in for it. The guarantee would be in place for a limited amount of time.

MR. HANSEN: OPIC can provide political risk insurance against breach of contract by government entities. OPIC would have to decide that it is a situation that passes the underwriting criteria for non-coal projects, but it already has authority to stand behind Kenya Power payment obligations.

OPIC is one of the best in the world at doing wind and solar projects, but because of the politics of the carbon cap, it can only do one 300- to 400-megawatt thermal project per year worldwide. It restricted that to sub-Saharan Africa, but it should not have to make those kinds of choices because need in Africa for basic economic development is so great.

MR. HINKS: We still struggle with this. At the end of the day, how much renewable energy can go on the grid, especially a relatively unsophisticated grid? Kenya already has enough wind projects, but it does not have enough base-load power. We need to be more practical. OPIC will not allow coal, but might allow natural gas-fired projects. If the US government wants to help Africa, it needs to be more flexible with regard to fuel. It should set policy behind the needs of the country.

MR. HANSEN: Basically, neither OPIC, the US Export-Import Bank, the US Trade Development Agency nor the US Agency for International Development is going to support coal-fired projects. The Chinese do not have that limitation. I do not know whether anyone else on the planet does. Will the inability to support coal impair the effectiveness of this initiative?

MR. HOWLETT: The key for Africa is indigenous fuel sources. Many countries with natural gas and hydro are going to be fine. The key is balance. Coal has to be in the mix because Africa has coal as an indigenous fuel source. Some countries are going to be heavily dependent on coal. If the US unilaterally disarms from coal, then naturally coal-fired power plants will be built, but with the Chinese, Korean or Japanese technology. So it does handcuff the US initiative by taking that fuel out of the mix.

MR. HINKS: I have been fortunate to have been involved with Power Africa since before there was a Power Africa team. The Power Africa team is in listening and learning mode, looking at what it can do to help. We have an opportunity to convey the concerns that the private sector has. The team is sensible in terms of what can and cannot be achieved. It is putting staff in the US AID offices across the six Power Africa countries. It is looking at putting project delivery people in ministries.

Corporate Council on Africa has a Power Africa working group. That working group is going to be very much a voice and conduit for a coherent discussion with Power Africa. The problem right now is that the Power Africa team gets 20 calls a day from different people saying different things, and the message is not coherent. There is a need to coordinate.

It is crazy that we have coal-fired baseload power in the United States, Britain and Germany, but the minute that people start talking about coal-fired generation elsewhere, everybody throws his arms up. Africa will use its own natural resources and get coal-fired plants built by the Chinese or Indians. The Indians are quite interested in coal-fired plants in Africa.

MR. DEANGELIS: Planning in each of these countries for a balanced power supply is critical. Because of their small size, renewables allow you to electrify distant locations, and they can be delivered in an incredibly quick time frame. Two of our Denham portfolio companies have multiple development opportunities on wind and solar projects in many different countries in sub-Saharan Africa. The impediment is a log jam trying to get things done. You do need baseload power, but in countries that have 30% electrification rates, renewables certainly will help.

MR. EMEHELU: Is there anything in the Power Africa initiative that could help with micro grids or distributed generation development in Africa?

MR. DEANGELIS: The impediment to any project at the end of the day is lack of clarity of process, whether the project is a 10-megawatt solar project or a 300-megawatt combined-cycle project. We have the capital and resources to realize those projects. The good thing about sub-Saharan Africa is that it has excellent renewable energy resources. You can have a really competitive power price at the end of the day, but to deliver those projects, you need a clear path to get them closed or they will die on the vine.

MR. PARKER: There is also the question of whether Power Africa will survive our current president. Right now, we have project developers who spend weeks and months in country running from government office to government office trying to get various people to agree to sign things. If there is a way for Power Africa to end up with an office where you can go and, based on a set of completely clear criteria, get the signatures you need and you are done, that would be a tremendous help. It would also address the problem with corruption in some areas.

MR. HINKS: You are absolutely right. The ministers in these countries have signed up to Power Africa, and they will not want to be embarrassed. The low-level problems delaying things can make a huge difference.

MR. HANSEN: Are we creating an opportunity for our Chinese and other competitors by not supporting coal projects? How can we compete effectively given the resources that we do have available?

MR. HOWLETT: There are two areas where the US fits very well with where Africa is. One is on leapfrog technology. We have seen it in Africa with mobile phones and cellular networks. Africa did not build a lot of landlines and leapfrogged right to the latest technology. In Africa, smart grids are defining the way power works. You do not have to build large centralized power plants. The technology exists to build a more distributed network. In the near term, we should look at the Turkish model where, 20 years ago, Turkey did a lot of inside-the-fence power projects partnering with local industry in the private sector. That will be a way to move forward.

MR. LONG: Ultimately, we need to find the best solutions for the country or region. For example, instead of doing a coal plant in Ghana, there may be an opportunity to bring LNG from the US to Ghana and provide even a lower-cost solution in the medium term.

MR. PARKER: The answer is relatively simple. If you look at Chinese lenders to independent power projects, there have been very few examples of direct Chinese lending. The only example I know of was a situation where, for the first time, a Chinese lender used MIGA cover, which is not normal. Chinese lenders want either to go straight to a government loan or to get a full government guarantee on a project. US government agencies are willing to lend to an IPP in many cases without a government guarantee, but they know how to look at projects and take project-related risks. OPIC is probably the agency that can provide the cheapest financing at the longest tenor. Its terms are better than the Chinese. OPIC understands projects in a way that Chinese commercial lenders today do not understand.

MR. EMEHELU: What is the future of natural gas project development in Africa?

MR. DEANGELIS: We know there is gas available, and it could be a significant game changer. Unfortunately, it will not happen overnight. A tremendous amount of infrastructure, like gas pipelines and electric transmission lines, must be built first. We are at least five years away from having the infrastructure in place. South Africa is the largest power market on the continent. It is continuing to build coal plants and thinking about nuclear projects because there is no other alternative for an economy of that size. It has a large renewable energy program relatively speaking. That program has been a resounding success. But the gas reserves are tremendous and will be a huge game changer.

MR. PARKER: We will start to hear about a trickle of gas-fired power plants in the next 12 to 15 months on the east coast of Africa. The region will hit its stride with gas-fired power plants in about five years.

Political Risk

MR. HANSEN: Are participants thinking about OPIC or MIGA or the commercial political risk insurance providers when putting together deals or are you just deciding either to step up to the risk yourselves or pass on the project?

MR. LONG: When we first started looking at opportunities to invest in Africa, our initial thought was not to go after political risk insurance. We are learning that it really depends on the country and the structure within the country. At the end of the day, you have to see what a government guarantee really means. I think most African countries are making a strong effort to try to shore up credit ratings, and a lot of the countries are listing bonds and doing the things that they need to do to help this process. Ultimately, those will help reduce the cost of power in the country.

In terms of a bridge situation where we are trying to invest today, we are looking increasingly at political risk insurance as a downside protection to our investment to allow us to move forward with investments where the environment is not yet ideal. Our hope is that, as projects get done and payment records are established, we will no longer need political risk cover.

MR. PARKER: Political risk cover can entail no civil disturbance, no inconvertibility, etc. It would be interesting to hear what the experience has been. What does not seem to happen too often is the government showing up and taking the project. In subSaharan Africa, there have not been many cases of that. Even in countries where there are civil wars, the power plants usually remain intact. The bigger issue is breach of contract. The risk is payment risk, and that is the cover you need. If Power Africa can help governments create entities that will have both the ability and the willingness to honor their payment obligations under power purchase agreements, that would be optimal.

MR. DEANGELIS: The way to deal with credit risk effectively is to ensure that the entities are creditworthy.

MR. HANSEN: What do you with folks who are not there yet?

MR. DEANGELIS: Part of the solution is to reduce the cost of electricity. In almost all these countries, new generating facilities will reduce power cost and spur industry. You still have to deal with loss of power and theft, but over the long run. Power Africa can help in setting up supporting things like partial risk guarantees and escrow accounts so that monies are available and projects can get done in such a way that mitigates some of the payment risk. We have investments all over the world in power, but Africa has a reputation for all of these problems. The reputation is based partly on actual events, but some of it is undeserved. Power Africa can help to mitigate some of the risks and maybe have a snowball effect of improving Africa’s reputation.

MR. HINKS: I am very involved with an organization called the Milken Institute that represents probably the biggest group of financial investors. It has conferences a couple times a year. Two years ago, it did not have any coverage of Africa. Recently, it set up an Africa working group and has started having its first Africa sessions. Those sessions were filled with investors. These are the traditional investors investing in power projects around the world, but Africa is a scary new territory for most of them. The rooms were full. One thing that was loud and clear is that the Power Africa initiative is giving them some degree of peace of mind and security. There is a serious interest in project investments on the continent.

MR. HANSEN: What concrete progress have we seen since the announcement of the Power Africa initiative?

MR. HINKS: We have not been doing anything differently. We look at every deal on the merits of that deal. All of the things that have been said before about assessment of risk and political risk insurance are valid comments, but in the end you have to face those risks and feel confident that the utility will be able to pay you. The six focus countries were selected because the host government is willing and the utilities are strong. In the six countries, breach of contract is less of an issue than cash flow. The utilities in these countries have a problem because they sell electricity at cheaper rates than the cost to generate the electricity. That is the fundamental problem, and you cannot change that over night.

The fact that the US government has endorsed a country to be in Power Africa says something to the investors. If these countries do not show any interest in working to improve the environment, then they may not remain on the Power Africa list, and there will be other countries coming in to Power Africa.

MR. HOWLETT: Washington can agree on very few things right now, but we have seen the radical right and the radical left agree that Power Africa is a priority and that this is something they want to support. It is the one thing that I have seen in 25 years in Washington that has true bipartisan support right now. There are always folks that oppose anything new, but such opposition is minor right now. This gives us some real hope that this initiative has some legs and will remain on track.